Question

Question Help Common stock valuation) Abercrombie & Fitch's common stock pays a dividend of $2.75. It is currently selling for $31.17. If the firm's investors require a return of 9 percent on their investment from buying Abercrombie & Fitch stock, what growth rate would Abercrombie & Fitch have to provide the investors? The growth rate Abercrombie & Fitch would have to provide the investors is %. (Round to two decimal places.)

growth rate required

Answer 1

Compute the growth rate, using the equation as shown below:

Required rate = {Last dividend paid*(1 + Growth rate)/ Stock price} + Growth rate

            9%     = {$2.75*(1 + Growth rate)/ $31.17} + Growth rate

            9%     = 0.0882 + 0.0882Growth rate + Growth rate

After rearranging the above equation, the growth rate can be computed as:

Growth rate = (9% - 8.82%)/ 1.0882

                    = 0.17%

Hence, the growth rate is 0.17%.